Monday, Apr 02 2012
• 10 a.m. (ET)

Apple and Working Conditions in Overseas Factories

In this May 26, 2010 file photo, staff members work on the production line at the Foxconn complex in the southern Chinese city of Shenzhen, southern China. A pledge reported Thursday, March 29, 2012 by the manufacturer of Apple's iPhones and iPads to limit work hours at its factories in China could force other global corporations to hike pay for Chinese workers who produce the world's consumer electronics, toys and other goods. Foxconn Technology's promise comes as Beijing is pushing foreign companies to share more of their revenues with Chinese employees.
(AP Photo/Kin Cheung, File)

Foxconn, a major manufacturer of Apple products in China, has promised to raise worker wages and cut overtime hours. A recent review by the Fair Labor Association found evidence of widespread labor issues at three factories in China operated by the Taiwanese based company. As an ever greater share of manufacturing shifts to cheaper labor markets around the world, Foxconn, and the technology industry in general is coming under the kind of scrutiny faced by overseas apparel and show manufacturers in the 1990’s. Please join us to discuss new concerns about international labor standards in the 21st century global supply chain

Guests

Robert Scott
is an international economist and director of international programs at the Economic Policy Institute.

C. Fred Bergsten
director of the Peterson Institute for International Economics and author of "China's Rise."

Transcript

10:06:56

MR. TOM GJELTENThanks for joining me. I'm Tom Gjelten of NPR sitting in for Diane Rehm. Diane is having a voice treatment. After an investigation found substandard working conditions at three factories in China where iPhones and iPads are assembled, the company, Foxconn, promised changes. We'll be talking today about labor conditions at Apple's suppliers in China and about efforts generally to improve working conditions at overseas U.S. suppliers.

10:07:24

MR. TOM GJELTENJoining me here in the studio are Judy Gearhart of the International Labor Rights Forum, Robert Scott of the Economic Policy Institute and Fred Bergsten, founding director of the Peterson Institute for International Economics. You can join the conversation. Have you thought much about the workers who actually assemble your iPhones and iPads? What do you know about their working conditions?

10:07:47

MR. TOM GJELTENWe'll be taking your comments and questions throughout the hour. Call us on 1-800-433-8850. Send us your email at drshow@wamu.org. Or, of course, you can join us on Facebook or Twitter. But, first, joining us by phone from Geneva is Auret van Heerdon. He's the president and chief executive of the Fair Labor Association, and it was his organization that issued that report on working conditions at Foxconn. Good day, Mr. Van Heerdon.

10:08:21

MR. AURET VAN HEERDONGood day.

10:08:23

GJELTENSo, first of all, tell us about your report, how it came about and what you found.

10:08:31

HEERDONOK. Apple joined the FLA in January, and as an affiliate of the FLA, they have a certain quota of monitoring that we would do every year. But they actually decided to add on to that a special investigation into their key contract manufacturers, and Foxconn was the first up. So we mounted this investigation in February. We put a lot of effort into it. It was over 3,000 work hours.

10:09:01

HEERDONWe had over 30 people on site, and we interviewed 35,000 workers that was a representative sample of the workforce on Apple production lines. And it was representative by age, sex, skill level, migrant, non-migrant, et cetera. Today, it was -- the confidence rating was about 99 percent. So it was the best sample we could draw. And what we found is pretty much what you would expect of a factory in China nowadays. The key issue really is hours of work.

10:09:35

HEERDONThey're working too many hours. They're in -- above code levels in peak periods. They're also above Chinese levels, legal levels. Code level is 60 hours a week. The Chinese legal level is only 49 hours a week. So they're in breach of both standards. There are also a lot of health and safety issues. And our -- we paid a lot of attention to that because of the explosion that there'd been and because of general stakeholder perceptions that this is an unsafe workplace, so we went into it in exhaustive detail.

10:10:11

HEERDONAnd we found issues with interns. They have about 2.7 percent of the workforce on average is made up of interns. These are students sent by vocational training colleges and by universities and putting up with the interns who were working overtime, which they shouldn't be. So we've made all of these recommendations to both Apple and Foxconn, and the response was actually very, very constructive.

10:10:37

HEERDONAnd the key recommendation that we're really following up on now is that Foxconn has committed to getting its working hours down to 49 a week, down to the Chinese legal limit, the first company I know of that has publicly made such a commitment. Hours of work has been a really tough challenge for every company in China, and I've never seen anybody go out publicly and say, we'll get it down to 49. So that's a major...

10:11:02

GJELTENCan I interrupt you? Mr. Van Heerdon, can I interrupt you? Because this is a really important point. Working -- hours worked is a big issue, as you say, throughout China. Now, my understanding is that Chinese workers actually, in many cases -- did your survey find great dissatisfaction with the number of hours they were working? Or did you find, in fact, that Chinese workers feel that they need the wages so badly that they actually volunteer to work more than they're supposed to work?

10:11:32

HEERDONWell, that's a very, very interesting question. And the answer is actually quite complex because it's true when you ask workers if they would like to work more hours, they say yes, especially overtime hours because they're paid at a premium. When we asked them how many they would like to work, they, you know, they were happy with something about 56 hours. But we then correlated that with the answers they had given us about job satisfaction and about contentment.

10:12:01

HEERDONAnd we actually found there that the correlation was strongest around 52 hours. So they're happy to work more. Let's say they're willing to work more because they want more money. But, actually, they're less happy if they do. So we thought that Foxconn's decision to go for 49 was actually a very positive one because it's close enough to that 52 hours where the contentment is greatest as well and said, you can give them the same money for less work. You then -- that's when you're really getting a win-win situation for everybody concerned.

10:12:36

GJELTENAnd will -- what will Foxconn do in order to maintain production of these Apple iPhones and iPads if it is not getting as much work out of the employees?

10:12:48

HEERDONRight. So it's clear they'd have to have the same output level for the same number of hours worked, so they're going to have to basically add another -- they've -- we're talking about a 20 percent cut in hours, so they're going to have to add enough workers to make up those 20 percent. And to do that, they've got to first build the dormitories.

10:13:06

GJELTENMm hmm.

10:13:07

HEERDONSo we have already started to look at this plan in a lot of detail. So they have to build a dorm room, hire workers, train them, get them in place and make sure that, as they ratchet down hours, they ramp up the number of workers they have.

10:13:20

GJELTENRight. Now, you said something important at the beginning, Mr. Van Heerdon, and that is that this investigation was initiated after Apple joined the Fair Labor Association. Can you say how Apple actually instigated -- did it instigate this investigation? Did you do this at the request of Apple? Has Apple been supportive of your investigation? And how did Apple respond? You mentioned how Foxconn responded. How did Apple respond to your conclusions?

10:13:48

HEERDONApple did instigate this investigation. It's over and beyond the requirements of their participation in the FLA. And I think the reason they did it is because there has been, you know, so much debate about what's really going on in these factories, what are conditions really like, that Apple felt they just need to actually get an independent third party in there to just discover all of that and publish all of that.

10:14:13

HEERDONSo our job, really, was to draw back the curtain and let the light shine in and let everybody look inside and say, OK, this is what we'll fix. You know, we'll fix everything that's wrong. But this -- we really needed to give the public and the consumer and the stakeholder the sense that we're not holding anything back.

10:14:34

GJELTENNow, you know, the -- when you talk about concerns about wages and working conditions and hours worked, these, of course, are issues that are familiar to workers everywhere. But in China, you have this other issue of worker suicides, which really has to grab the attention of anyone concerned about working situation in China. What can you tell us about what motivated -- I think 14 workers at Foxconn committed suicide in 2010.

10:15:00

GJELTENAnd if I'm not mistaken, you had a number of workers at a Foxconn factory who literally threatened to jump off a building if their demands were not met. What is driving these workers to make such extreme demands or to be driven to such desperation?

10:15:17

HEERDONYes. That's an extremely complicated question, and I'm certainly not qualified to comment on it. I know that a lot of psychologists have looked at this. Apple and Foxconn themselves brought in some top experts, U.S. experts to look at that. And let me just say that what we will do is -- we actually know a lot now about working conditions at Foxconn. And to the extent that those -- and we know a lot about what they're not satisfied with, where the discontent lies.

10:15:51

HEERDONAnd so to the extent that that discontent is involved in a factory and the suicides -- and we'll take all of that information and share it with those experts now and give it to them and, you know, give them all of our raw data and say, look, if this can help you in any way to develop better methods of prevention, then, you know, we'd happily collaborate in that sense. So I'm confident that we are learning more about what drives workers at Foxconn, and we can actually make their lives a lot better as a result of this research.

10:16:24

GJELTENWell, Mr. Van Heerdon, you said that Foxconn -- you -- it sounds like you are encouraged by the response of Foxconn to your findings. Now, of course, Foxconn has been -- has gotten a lot of attention in the past, and there have been complaints that it has not been responsive to concerns raised about working conditions there. What makes you optimistic? What makes you so encouraged about Foxconn's reaction this time?

10:16:50

HEERDONThree things, really. We -- before I went in, when Apple first suggested this investigation, I said there were a couple of things we needed to settle before we could take it on. One was that I want you to know that the Foxconn CEO was committed to the stage. This is Terry Gou, the founder of the company. And I wanted him to commit to it because I didn't want us to be, you know, involved in a kind of cat-and-mouse game with Foxconn.

10:17:17

HEERDONSo we sat down with him, and he committed himself to it wholeheartedly, assembled his top staff, told him who we were, why we were doing it and gave us a public assurance of full unrestricted access. Secondly, I wanted Apple to sign a contract saying that they would allow us to investigate, to publish, and that they would remediate all the issues we discovered. They agreed to that. And so that gave us a sense that we now have the commitment on board. We have everybody on board. But the two reasons I'm confident we'll be able to drive this all the way through is that...

10:17:55

GJELTENVery quickly, sir.

10:17:57

HEERDONSure. We will verify. We will verify, and we will publicize our verifications. So the public doesn't need to take this on good faith. They'll see the facts. And with such a public commitment by two of the world's most prominent companies, there's no way they're not going to execute.

10:18:12

GJELTENOK. Auret van Heerdon is president and chief executive of the Fair Labor Association. It was his organization that issued a report last week on working conditions at Foxconn, which is the company that assembles Apple iPhones and iPads. We're going to be taking a break here and, when we come back, more conversation on this issue with my guests. And we're also going to be taking your phone calls. Do you have any thoughts about the iPhones and iPads that you use and how they were produced, what the conditions are of workers who made them? Stay with us.

10:20:04

GJELTENWelcome back. I'm Tom Gjelten, sitting in today for Diane Rehm, and we're talking this hour about the factories where your iPhones and iPads are produced and the working conditions there. My guests here in the studio are Robert Scott. He's an international economist and director of international programs at the Economic Policy Institute. Also, Fred Bergsten, he's the founding director of the Peterson Institute for International Economics, and he's the author of the book, "China's Rise." And Judy Gearhart, executive director of the International Labor Rights Forum.

10:20:37

GJELTENAnd, Judy, I want to start with you. You just heard this summary of the report from the Fair Labor Association from Auret van Heerdon, who's the chief executive of that group. What did you find significant about that report? To what extent does it resonate with what you have found in your own investigations? And do you agree with him that this could actually be a turning point for Chinese workers?

10:21:04

MS. JUDY GEARHARTThank you. The report is helpful in that it confirms a lot of the information that groups on the ground have been saying for a while, a lot of the problems that Apple has been promising to fix for five or six years now. The question is, how pivotal will this be? And Apple's addressing this in a very aggressive manner. They're engaging the FLA once they're on the FLA's board, and they're not necessarily working with some of the most independent investigators, such as SACOM, which is based in Hong Kong.

10:21:35

MS. JUDY GEARHARTAnd they've identified, for example, in May of last year, they identified problems with the aluminum dust and the potential for an explosion, which happened two weeks later and killed four workers. So, really, they're not completely with this report going to the extent that they could in terms of engaging fully independent investigators. Now, how pivotal is it for the industry? It's not an industry effort. It's one company being competitive and aggressive and showing that they can do this. Question is, is -- Apple has probably higher profit margins than some of its competitors.

10:22:07

GJELTENMm hmm.

10:22:07

GEARHARTFoxconn is producing for many more brands than Apple. What is Apple going to do in terms of its lead times to control the working hours, in terms of how much it's paying for the Foxconn products? And what about the production that Foxconn does for other brands? How will those brands react? And doesn't this just really put Apple in a better market position in the end?

10:22:29

GJELTENWell, Rob Scott, the commitment here was made by Foxconn directly to Fair Labor Association. Now, do you anticipate that Foxconn will apply these same commitments everywhere it works in China?

10:22:44

MR. ROBERT SCOTTWell, I think that depends on the leverage that Foxconn brings to bear. But I think there is a much larger question at stake here. These problems are not new. There have been reports of this kind of violation at Foxconn involving Apple since at least 2006. At that point, Apple made almost identical statements, then engaged a firm known as Verite that was supposed to come in and monitor changes in labor rights, reduce excessive overtime.

10:23:14

MR. ROBERT SCOTTIt didn't happen. So the problem here is not the commitment. It's the follow-through. It's finding some way to actually make sure these changes happen. Part of the problem with the Fair Labor Association is that they are a client of Apple. Apple is one of their biggest funders.

10:23:34

GJELTENMm hmm.

10:23:34

SCOTTAnd this is very much like the problem we had in the financial crisis, where you had the big independent bond rating agencies being paid by the bond issuers themselves.

10:23:45

GJELTENMm hmm.

10:23:45

SCOTTThere's a real question of credibility there, and I think it's the same thing here. And you need independent monitors, I think, in these factories to ensure that these changes are actually made.

10:23:55

GJELTENFred Bergsten, one thing to consider here is that we're not talking here about a Western economy. We're talking here about a command economy, where the Communist Party is, of course, in charge, so one of the implications to that is the attitude of the government toward these issues has to be very important. I mean, you couldn't have a strike in China and labor unrest in China without some sort of tacit government approval, right? And what do you see as the Chinese government's stake in the resolution of these issues? What's their interest?

10:24:25

MR. C. FRED BERGSTENWell, the Chinese government wants to keep its economy very competitive in the world, so it would worry about steps that might undermine their ability to continue to run big trade surpluses and strengthen their economy. But I think there are a couple of broad economic forces at play here that suggest that the Chinese government will stand aside and let Apple and Foxconn improve their conditions if they choose to do so and also suggests to me that Apple and Foxconn may well do so. First, the labor cost in an iPad is miniscule...

10:24:59

GJELTENMm hmm.

10:25:00

BERGSTEN...estimated anywhere from one to 3 percent of the cost of your iPad. Probably, labor cost increase here -- or total labor cost may be $10 per iPad against a retail price close to $1,000. So it's very small stuff. That means that Apple -- Foxconn, in particular -- can raise wages through direct increases in wages or, as you said, shorter working hours and better conditions without really impairing their competitiveness very much.

10:25:31

BERGSTENIn fact, it's a bit of mystery to me why they have let this thing blow like up like it has and not done that before because they can let wages rise substantially -- in percentage terms, 50 percent -- without, in any way, impairing their competitiveness. Not to mention that Apple has such price making capability in its markets, they could pass it on to the consumer anyway. So I think they'll do it.

10:25:53

GJELTENBut as Judy pointed out, Foxconn also assembles products for many other suppliers that don't have the same profit margin or cash reserves that Apple has.

10:26:02

BERGSTENBut it's hard to imagine a supplying -- or an assembling company like Foxconn treating one of its customers very different from the way it treats its others. And if Apple does, in fact, lead in the right direction here, I think it probably would spread, be very hard to avoid that. But the second thing I want to mention is that there's very rapidly rising wages across the Chinese economy.

10:26:26

BERGSTENThis economy has been growing 10 percent for 30 years. It's going to continue to grow very rapidly in the foreseeable future. They're actually running into labor shortages now in some sectors. If Foxconn does, in fact, cut back working hours and therefore, as you said, has to go out and hire a lot more people to keep output up, I'm not sure they'll be able to find those workers quite as easily as falling off a log.

10:26:49

BERGSTENBut that all means that the pressure from the market is constructively supporting the effort of the companies to raise wages, improve working conditions because that's the basic direction in which the overall economic environment is pushing.

10:27:06

GJELTENJudy Gearhart, do you agree with that, that the market forces here are sort of on their own, pushing wages up in China and making employers compete more for good workers?

10:27:17

GEARHARTIn certain pockets in Southern China, there are labor shortages, and that is putting upward pressure on the wages. But I think we're not really looking at the whole picture of workers' lives here. I think the current situation is you have a lot of workers who are coming in from the provinces, who do not necessarily have the promise of staying where they're working. They don't necessarily have a very balanced life, so, if you reduce the hours, it's a question as to what else is there for them to do.

10:27:46

GEARHARTAnd as much as we are seeing more and more workers that don't want to go back to the rural zones -- and I think it's wrong to assume that they want to go back to the rural zones, which has been one of the things that's come out in these reports -- it's important to think what's the cost of living in Shenzhen. I mean, these cities are very expensive, so as much as wages maybe going up, they're not going up proportional to what the cost of living in these cities is going up.

10:28:10

GJELTENRob, the -- one of the new factors here is that there's a new boss at Apple, Tim Cook, and Tim Cook, just last week, actually visited factories in China, something that Steve Jobs never did. How important -- we've been talking here that Apple's made these commitments before these charges had been made against Apple before. But we have new leadership at Apple. Is that a significant factor here?

10:28:34

SCOTTI think it represents the potential for change. But there are at least two things we need to see Apple do, and, I think, Fred's alluded to them earlier. They have to, first of all, reduce the pressure on Foxconn to generate enormous quantities of product in a very short period of time. We saw a story that came out in The New York Times, I think, end of January about how management woke up thousands of workers in the middle of the night and fed them a cup of tea and put them on the assembly line for 12 hours making the newest iPhone. And that's typical of what goes on in these plants.

10:29:11

SCOTTAnd it's Apple that's driving that demand. They want those phones here now. The second thing is, Apple, from (unintelligible) is paying something around the order of a dollar and half a phone, per iPhone, to have those phones assembled. They can raise the amount that they're willing to pay, which will enable Foxconn to pay higher wages. So I think Apple is intimately involved in this problem. They have got to put their money where their mouth is. And if they pay more, then Foxconn will be able to -- as Fred says, to track more workers. And that's really key.

10:29:42

GJELTENNow, Fred, what are the market dynamics here? Because it's not simply a matter -- correct me if I'm wrong -- of how much Apple pays its workers and whether those workers can go somewhere else because we have a supply chain now in China, right? It's not just the Foxconn factory where the iPads are assembled. There's all kinds of other factories that are part of that supply chain that goes to produce iPads and iPhones and other things.

10:30:08

BERGSTENRight. And that supply chain is worldwide. It's not just a series of factories across China. But, in fact, a lot of it is outside China, in other Asian other countries, even in some U.S. factories, input to China, and then part of the final assembly there that comes back out, sold around the world. So it is a global supply chain. And that's the flip side of what I said earlier, that the labor cost in the Foxconn factory in China is a tiny, really miniscule share of the total cost of the final product.

10:30:38

GJELTENMm hmm.

10:30:42

BERGSTENAnd that's why, I think, there's a lot of room and scope for Foxconn, for Apple and its other customers to increase wages substantially without really significantly hurting the competitiveness of their product. And, therefore, it seems to me, the name and shame campaign going on here is sort of pushing on an open door in terms of the basic economics of the industry.

10:31:05

GJELTENMm-hmm. Judy, what do you think the implications are here for workers in other countries? And we were talking earlier that, in fact, workers in China are not the most low-paid workers in the manufacturing world today by quite a long shot, correct?

10:31:20

GEARHARTNo, they're not. And Bangladesh is one of the places, the hotspots where we're very concerned about the poverty wages and the building infrastructure and the worker dust that occur because of those problems with building infrastructure. But, I think, when we talk about supply chain with Apple, it's important to really put this all in perspective. There's a lot of public relations going on around this Apple endeavor right now.

10:31:45

GEARHARTAnd, like Rob was saying, it's going to be important to sustain the pressure around this because they've made promises before. They haven't followed through. And we've seen this cycle happen before in the apparel industry where companies make promises. They fail. They make slightly better promises when there's a campaign. They do a little bit better. But then, eventually, things sort of fade back, and there's not really this sustained change.

10:32:07

GEARHARTOne of the issues we've had is a factory in Turkey that's producing sort of the leather binders and things like that for iPads, the -- and for other -- Nokia and other phones and things like that. They have come to us, and the workers are saying there's a labor dispute. And the union is being repressed, and workers have been fired. And they have said, you know, can you help us? And we've gone -- Nokia has been very responsive. Apple has said, oh, that's not in that part of our supply chain we're monitoring right now.

10:32:34

GJELTENMm hmm.

10:32:35

GEARHARTThey have a lot more to do.

10:32:36

BERGSTENTom, just...

10:32:37

GJELTENJudy -- one second, Fred.

10:32:38

BERGSTENYeah.

10:32:39

GJELTENI just wanted to point out that we -- this is "The Diane Rehm Show," and I want our listeners to join us. This is "The Diane Rehm Show." Go ahead, Fred.

10:32:46

BERGSTENJust to put a figure on the table, the IOA report indicated that the average wage of the Foxconn workers is a little over $5,000 a year. Now, that's not high by U.S. standards, but it's not bad by Chinese standards and standards of developing countries, which China still is. And those numbers, as I said before, are rising rapidly, at least 10 percent, in many cases 20 percent a year. So the wages in the industry itself are not bad. You can't say they're underpaid in a kind of general sense.

10:33:21

BERGSTENOn the other hand, you want to make sure that those wages do reflect their productivity growth. And when Chinese workers move from the rural area into the urban areas and the manufacturing sector like this, their productivity goes up hugely. So the real trick, in terms of the economics of it, is to make sure they're being adequately rewarded, even though in absolute terms their salaries, by Third World standards, are not bad at all.

10:33:44

GJELTENRob, let's look at this for a moment, from the standpoint of the American consumer. Obviously, we want our iPhones and iPads to be as cheap as possible. We're also very concerned about the trade deficit because that means loss of jobs overseas. What is at stake here purely from the perspective of the American consumer?

10:34:03

SCOTTWhat's, I think, at stake here is really for the American consumer to be able to feel comfortable about the products they're buying.

10:34:11

GJELTENMm hmm.

10:34:12

SCOTTSmall increases in the wages paid at Foxconn, reductions in hours worked are not going to affect measurably China's huge trade surpluses in the United States. We have lost well over 2.8 million jobs to China since they joined the WTO in 2001. This -- fixing these problems, even if they are addressed, is not going to change that. But I was at a party with a group of friends last night and told them we were going to talk about this issue. And they all got their iPhones out, looked very guilty, you know? And so I think consumers do worry about this, and that's where the public pressure is coming from.

10:34:47

GJELTENAnd, Judy Gearhart.

10:34:48

GEARHARTJust -- the one last point about the workers' side of the story, I think a lot of the effort right now is focused on a top-down approach to looking at management systems and auditing from the outside and how do you change Apple and how do you change Foxconn, but there's not as much, by far, effort going into how do you enable workers to claim their rights?

10:35:09

GEARHARTAre there labor law clinics that are supporting those workers? What other kind of infrastructure is there that can support the workers' ability to claim their rights? You can't give them their rights. They have to be able to claim their rights.

10:35:20

BERGSTENYeah, and just to pick up a point, Rob said, I think this is a win-win for both the U.S. and China. As I said earlier, as Rob indicated, to the extent this does have some impact, marginal impact on higher cost in China, it may reduce that huge trade imbalance a little bit, which is certainly a big U.S. objective. We'd like to see that, have more jobs here at home, better domestic economy.

10:35:44

BERGSTENAnd we all want a better shake for workers around the world, including in China. So I think this is a win-win. And it's hard to see anything short of a vast majority rallying around this approach, which is why, I think, it makes it very hard for the companies not to come through on what they've promised.

10:36:01

GJELTENWell, if Chinese workers are paid more, they're going to have more money to spend. To what extent will that actually boost sort of the consumer demand in China, which the more consumer demand is boosted in China, the more likely they are to buy things from outside China and therefore reduce their own trade surplus a bit?

10:36:17

BERGSTENThat's a critical point. Henry Ford taught us that here in the United States back in the 1920s. You remember, he said, I'll pay my Ford workers more. They'll be able to buy the cars and other things, and the economy will strengthen. And there's a lot of truth in that. It's particularly true in China today. Chinese growth for these 30 years, particularly the last 10, has relied very heavily on running large trade surpluses with the U.S., Europe and the rest of the world.

10:36:42

BERGSTENThat has become incompatible with a strong and sustainable global economy. It's just putting a lot of pressure on open markets. It's led to backlash here in the U.S., as well as elsewhere. The Chinese themselves realize they have to fundamentally alter their model. They have to rely lots more on domestic demand growth, instead of selling to the U.S. and other foreign markets, and that, in particular, requires an increase in domestic consumption.

10:37:07

BERGSTENConsumption in China is less than 40 percent of the total economy, by far the lowest in the world. India is more than 60, not to mention the U.S. at 80. China is a true outlier. A whole panoply of its policies have suppressed domestic consumption. They need to be opening up on all those fronts, and higher wages, like in this case, will certainly support that in a big way.

10:37:31

GJELTENFred Bergsten is director of the Peterson Institute for International Economics and the author of "China's Rise." We're talking here about the conditions under which your iPhones and iPads are assembled in China. We'd like to know if you are concerned about those issues. Join us. We'll be right back.

10:40:04

GJELTENWelcome back. I'm Tom Gjelten, sitting in today for Diane Rehm. And we're talking about working conditions in China. My guests here in the studio are Robert Scott, an international economist at the Economic Policy Institute, Fred Bergsten -- he's director of the Peterson Institute for International Economics -- and Judy Gearhart, executive director of the International Labor Rights Forum.

10:40:25

GJELTENAnd we're going to go now to our calls. You can join this conversation by dialing 1-800-433-8850. Or send an email to drshow@wamu.org. I'm going to be reading some comments that we've gotten here on Facebook and Twitter as well. But, first, let me go to Dan, who's calling us from Ann Arbor, Mich. Good morning, Dan. You're on "The Diane Rehm Show."

10:40:51

DANHi. Thanks for taking my call. I am the proud son of an ironworker now working in a steel mill here in Michigan. And, I guess, I'm kind of surprised that this conversation doesn't happen more on the home front. You see, he has this job at the steel mill and makes, you know, certainly higher living wages than they do in China, but he is working 12 hours a day, six to seven days a week. Even if he does get the day off during the week, the company can force him to come in and work 12 hours on the seventh day.

10:41:30

DANAnd while he may be making the living wage, you know, it's sort of, like, what's the point if he doesn't have time to spend it with his family? I rarely see him. You know, he works 12 hours, sleeps for six to eight hours, and then, you know, he's right back on his way to work. Why doesn't this conversation take place domestically? And, you know, what's being done on the home front? You know, the unions don't have the leverage and power that they used to. You know, if you want a job here domestically in this economy, you got to put up or, you know, it's the company's way or the highway.

10:42:03

GJELTENYou know, Dan, we actually -- your comment resonates with a number of our listeners as well. We have here an email from Tor, (sp?) who says, "What's amazing to me is that in the U.S., unemployment is around 8.5 percent, and people in the U.S. are actually concerned with working conditions in China. Who cares? Get back to me when a working man in the U.S. can find a job." I'm sure that you have heard these concerns before. Judy. How do you respond to them?

10:42:31

GEARHARTWell, I think Dan's absolutely right. I think we need to raise working conditions across the globe. But the way the global economy is so interconnected now, we can't just think about one country or the other. And we definitely need to work on some of the lower-wage countries or the countries where the working hours are even more excessive and the proportion of wages to cost of living is even more stretched.

10:42:58

GEARHARTNot to say that we don't need to work more and more in the U.S. I mean, increasingly, with the global economy, a lot of the production abroad has undercut and pushed hard on the wage-an-hour ratio in the U.S. as well.

10:43:11

GJELTENAnd we have here an email also from Donald, and he asks, "With the relatively low production cost on Apple products, is there a reason why at least some of the production couldn't be done in the U.S.?" A very legitimate question. Fred, is there -- I know that Steve Jobs told President Obama when President Obama asked him this personally, he said those jobs are never coming back to the United States. Why is it that Apple's jobs are permanently lost?

10:43:40

BERGSTENWell, as you mentioned before, the Apple products and many other products now are the result of a very complex, multi-pronged global supply chain with different components made in different places. At the end of the process comes assembly, which is what we're talking about in China. As I said, it's only one to 3 percent of the total cost of the product.

10:44:05

BERGSTENSo if you brought it back to the U.S., you probably wouldn't be affecting too much of the final cost, and, therefore, they might want to consider it. On the other hand, the wage costs in China are still substantially smaller than here, and so you'd get a substantially higher price for the product if you made that switch.

10:44:25

SCOTTI just would like to add to that a little bit.

10:44:28

GJELTENYeah, Rob.

10:44:28

SCOTTI think what we have to recognize it that since the making of these Apple products is global enterprise, involves dispersed products (word?) all over the world, what we really want to do is raise the domestic content of those products. And the best way to do that is to convince China and other countries in Asia to revalue their currencies. They've been suppressing their currencies by buying up billions and billions, and in China's case, trillions of dollars worth of U.S. currencies and making their currency artificially cheap.

10:45:02

SCOTTIt acts like a subsidy on their exports, tax on our exports to China and the rest of the world. And if we get them to level the playing field on that issue, then we can make more of those products here -- maybe not the final assembly but maybe the screens and the integrated circuits that go into them.

10:45:18

GJELTENOf course, Chinese currency has been appreciating somewhat over the last couple years and...

10:45:22

SCOTTTo a small extent, but it barely keeps up with the growth and productivity in China.

10:45:26

GJELTENLet's go now to Ryan, who's calling us from Murray, Ky. Good morning Ryan. Thanks for calling. You're on "The Diane Rehm Show."

10:45:33

RYANGood morning. The conversation has sort of changed towards my comment. But I recall, six or seven months ago, NPR did an interview with a Chinese employee that produced products for Wal-Mart. It's interesting, the difference between the consumer culture for those who are pushing for better working conditions in the Apple products. But the Wal-Mart discussion came and went, and we don't care. I'm hoping your guests would comment on that.

10:46:00

GJELTENWell, you know, Ryan, once again, you've raised an issue that has also been raised by someone sending an email. Constance writes, "Would we be talking about conditions in China if Apple weren't involved? Apple is a prestigious and successful company with premium products. So if they have problems with substandard factories, it's a big deal. Would you be concerned about the labor conditions in the factory that made the clothes you wear or the toys your kids play with?"

10:46:26

GJELTENSo what about that, Judy? Is Ryan and Constance -- are they on solid ground here in pointing out that perhaps Chinese employees at other factories are suffering even more than the Chinese employees at those factories where Apple products are made?

10:46:42

GEARHARTQuite possibly. I mean, China's a huge country with a lot of production. So you have all different kinds of skill sets and different looks inside different factories, some that are very state of the art, like Foxconn, and some that aren't as great. But I think the bigger point Ryan's getting at is the fading of attention, and that's really important. I mean, there are a lot of groups that have not forgotten about Wal-Mart.

10:47:05

GEARHARTAnd we're still working hard on different angles to try and pressure Wal-Mart to make much more serious changes in their supply chain management and in what they're doing in the U.S. in terms of allowing freedom of association in their stores, which has been significantly problematic. But as we move forward with the Apple case, I think we have to beware of what Ryan's raising. We don't want to lose the attention.

10:47:31

GEARHARTThe media has done a great job on putting this out there in the public sphere and pushing Apple. Apple had been promising to make a lot of these changes for six or seven years. We've been seeing them not really follow through on that. We are not necessarily convinced that an audit and an engagement with a group on whose board they sit will significantly change how their compliance is in their supply chain. We need the sustained attention to this issue and the sustained pressure.

10:48:01

GJELTENFred. Fred Bergsten.

10:48:03

BERGSTENTom, the answer to your last question is almost certainly yes. Study of foreign investors around the world, including in China, shows that they almost always pay higher wages than local firms. The foreign firms, for a variety of reasons, do pay more. And, as I indicated before, the average worker at Foxconn is getting $5,000 or more a year, not bad in that context. It may not be enough, but it's certainly a lot more than they get from the local alternatives. Secondly, the Wal-Mart case really does raise the tension, and almost dilemma, in U.S. reactions to this whole set of issues.

10:48:44

BERGSTENIn the case of Wal-Mart, which imports lots of clothing and lower tech products, the labor content is higher, and so the lower wages in China make a bigger difference. In that case, you pit the American consumer who really wants the cheapest possible T-shirts versus the American workers who have lost jobs in that sector and others and where, as Rob said, we have an overall problem of exporting jobs because of China's undervalued currency, cheating on trade policies and a whole variety of things, including suppressed wages in some cases.

10:49:17

BERGSTENAnd so, within the United States, we get a lot of tension and a lot of debate. We're a consumer society. Eighty percent of our economy is consumption. That has a huge weight in our politics. And that, frankly, has been one reason that we have not gone harder against China on the currency and on lots of issues where those who would worry about jobs and even economic growth here might have taken a more hawkish position.

10:49:41

GJELTENMm hmm.

10:49:42

SCOTTYou know, I think there's a related point, which is that if we're going to complain about labor rights in China, we have to be willing to defend the labor rights we have in the United States. And as I prepared for this discussion today, I was struck by the fact that China has standards on maximum standard work hours a week -- 49 hours a week for a regular work week, maximum overtime, 36 hours a month. The United States has no standards on maximum overtime hours as we heard from a caller earlier.

10:50:13

SCOTTTwelve hours a day, seven days a week is not uncommon, 84-hour work weeks. In China, the legal maximum is about 58, so we've got much higher du jour maximum hours in this country, and you can have lots of forced overtime in this country. So we really need to do a lot more to clean up our own house.

10:50:34

BERGSTENOn the other hand, Tom, note that that underlies another domestic tension. We have high unemployment, as one of the callers said, a lot of people out of work, desperately seeking a job. On the other hand, workers coming in seven days a week, working 12 hours a day, working hugely more than a 48-hour week, so we've got a bifurcated labor force.

10:50:55

GJELTENBecause it's cheaper for employers to pay somebody overtime than to bring in a new worker, hire a new worker.

10:50:59

BERGSTENA lot of is that, but a lot of it is skills. A lot of it is geographic availability. It's a very complex set of issues, and it shows how our own labor market is not as dramatically and perfectly mobile as we often think it is.

10:51:13

GJELTENVery quickly, Judy.

10:51:15

GEARHARTIt's also about the willingness to commit to labor rights per se, and I think, there, if the U.S. does not have respect for labor rights, it affects the whole world.

10:51:27

GJELTENOK. Let's go now to Sarah who's on the line from Perry, Ark. Good morning, Sarah. Welcome to "The Diane Rehm Show."

10:51:34

SARAHGood morning. Thank you. I wonder what your guests have to say about the free trade agreement, the hindrance to our ability to ask anybody to do anything that costs them anymore money because of the non-tariff trade barrier that interferes with the way they want to run their company.

10:51:52

GJELTENFred.

10:51:53

BERGSTENThe trade agreements in recent years have included significant components on labor standards. There's been a big debate about that within the U.S. It's been highly politicized. But since 2007, when the Democratic Congress insisted on some tougher labor standard provisions in our trade agreements, beginning with the Peru Agreement, that has become standard.

10:52:17

BERGSTENAnd in all the negotiations the U.S. is now pursuing, like the Trans-Pacific Partnership with a variety of Asian countries, the U.S. is insisting that those countries live up to certain globally-accepted labor standards as spelled out in conventions of the International Labour Organization. So that issue is now very much on the trade agenda and included in all U.S. trade agreement negotiations.

10:52:42

GJELTENFred Bergsten is director of the Peterson Institute for International Economics. I'm Tom Gjelten. You're listening to "The Diane Rehm Show." Did you have something to say, Judy, on that?

10:52:53

GEARHARTWell, yeah, I mean...

10:52:54

GJELTENI mean, it's trade….

10:52:54

GEARHART...specifically with the Peru Trade Agreement. I mean, there's been one complaint filed by public sector workers in Peru, but there's -- you know, the importance of enabling workers and worker organizations to have the capacity to drive forward and push for labor rights is important here.

10:53:15

GEARHARTAnd the fact that there hasn't been another complaint filed under the Peru Free Trade Agreement since it's been enforced since -- for so many years, it's really a problem. And it indicates this weakness of Peruvian labor and its ability to state what their problems are and claim their rights through the legal process.

10:53:33

GJELTENRob Scott.

10:53:33

SCOTTActually, the Peru -- to correct Fred a little bit -- the Peru Agreement was not the first one where we addressed labor standards. I think that Bill Clinton addressed this with the Jordanian Free Trade Agreement to...

10:53:44

BERGSTENYeah, it was just beefed up. They're beefed up, beefed up in Peru. Yeah.

10:53:45

SCOTTThey're beefed up, beefed up in Peru. Yeah. But the broader point is that the labor rights are treated in a separate silo in these trade agreements. They are enforced separately. They're addressed separately, whereas all the other core elements of the agreement are addressed to a common process. If countries don't abide by them, they can take them to panels. And tariffs can actually be imposed in the end if -- or penalties can be imposed if countries are not abiding by the agreement.

10:54:12

SCOTTThat doesn't apply with labor rights, and it should. Labor rights should be treated in exactly the same way as any other provision of a trade agreement if we're going to enforce them.

10:54:20

GJELTENOK. Let's go to Carissa (sp?) now who's calling us from Dallas, Texas. Good morning, Carissa.

10:54:24

CARISSAHi. Hey. Hi, there. Thanks, Tom, for taking my call. My questions concerns the -- you guys were talking about Chinese rates of consumption and that they were policy-driven. And I'm wondering how that relates to the rates of savings in China and if there are philosophical roots, if it's a kind of anti-capitalist thing that they have such low rates of Chinese -- consumption compared to India and the United States. And I'll take my answer off the air. Thank you.

10:54:48

GJELTENFred, you have a thought on that?

10:54:49

BERGSTENWell, in a way, it's pro-capitalist. The Chinese households save a huge amount to pay for education for their children, to pay for their own health care because there's no health insurance widespread in China, and also to take care of their own old age, their pensions, because you don't have social security. So in that sense, it's -- you could call it cultural.

10:55:11

BERGSTENBut it's also, as in most developing countries, an absence of government support and safety nets that we're used to here, and even more so in Europe, that take care of those needs. Therefore, the Chinese households save very large amounts of their total income, don't consume. One of the remedies that the Chinese government says it's now in the process of applying and is doing so, but agonizingly slowly, is to fill some of those safety net gaps, take the pressure off the households, so they can begin to enjoy more of the fruits of their rising incomes.

10:55:41

BERGSTENAnd in that way, the consumption share of income should go up sharply. The flipside of it is that the Chinese government policies have suppressed interest rates. That has meant investment is very cheap. Investment has been overdone. If you have more investment, you have less consumption in economy, and that side of it also needs big reforms.

10:56:00

GJELTENA quick thought, Rob.

10:56:01

SCOTTYeah, and again, China has the resources to build a much deeper and more protective social safety net. They've been taking that money instead and using it to buy U.S. treasury bills, essentially just pouring it into a savings account. It doesn't help their consumers.

10:56:15

GJELTENRobert Scott is an international economist and director of international programs at the Economic Policy Institute. I've also been joined here this morning by Judy Gearhart. She is executive director of International Labor Rights Forum. And, finally, by Fred Bergsten, he's director -- founding director of the Peterson Institute for International Economics, and he's the author of the book "China's Rise." We've been talking about working conditions in China.

10:56:40

GJELTENAnd as you use your iPhones and iPads today, I hope you take into consideration the whole supply chain, the chain of working conditions that allowed you to buy that iPhone or that iPad for the price you paid. I'm Tom Gjelten sitting in for Diane Rehm today. Thanks for listening.

10:57:00

ANNOUNCER"The Diane Rehm Show" is produced by Sandra Pinkard, Nancy Robertson, Susan Nabors, Denise Couture, Monique Nazareth, Lisa Dunn and Nikki Jecks. The engineer is Erin Stamper. A.C. Valdez answers the phones. Visit drshow.org for audio archives, transcripts, podcasts and CD sales. Call 202-885-1200 for more information. Our email address is drshow@wamu.org, and we're on Facebook and Twitter. This program comes to you from American University in Washington. This is NPR.

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